Business development essay on: Opportunities and Threats to MNC’s Seeking to Do Business in China and PESTLE Analysis of China

Table of Contents

Introduction. 4

PESTLE Analysis of China. 4

Political Environment 5

Constitutional System.. 5

Stability of Government 6

Business Freedom.. 6

Trade Freedom.. 6

Tax Policies. 6

Legal Environment 7

Employment Regulations. 7

Technological Environment 7

Science and Technology. 7

Research and Development 8

Economic Environment 8

Unemployment rates. 9

Fiscal Freedom.. 9

Monitory Freedom.. 10

Investment Freedom.. 10

Financial Freedom.. 10

Interest Rates. 11

Inflation. 11

Managing Interdependencies: Social Responsibility and Ethics. 11

The Challenges of International Management and Planning. 12

The Role of Culture in International Management 13

The Cross Cultural Communication Environment 13

Cross Cultural Alliances and Strategic Implementations. 14

Organizational Structure and Coordination Systems. 14

Managing international Teams and Workforce diversity. 15

Bibliography. 17

APPENDIX A.. 19

APPENDIX B.. 19

Introduction

With the start of economic reforms since 1970’s China has shown unprecedented growth as it has been able to deliver higher income levels and at the same time it has emerged as the single largest contributor for global reduction of poverty levels across the globe. The market-oriented  institutional reforms being implemented along with effectual adoption and  strong investment, application of various latest  technologies and knowledge and foreign direct investment (FDI) and foreign trade policies has been the major contribution factors (Zhihua and Wang, 2007).

 Along with these tremendous successful landmarks there are few challenges too which the country faces. These threats for the successful investment or internationalisation of MNC’s in China need to be addressed in order to sustain the long term development of the country. Some of the major threats which have been analysed are (Zhihua and Wang, 2007):

• Weaker Institutions
• Weak indigenous innovation capacity
• Lower rate of overall education attaining
• Very Poor link between research and development (R&D) and implementation in industries etc.

This is the reason why we have selected China to analyse its political, legal, technological and economic environment. This way we will try to find out through Pestle Analysis of China, whether the political, economic, legal and technological environment of China poses an opportunity or threat to the MNC’s which are seeking to do trade or business in China.

 China is located in the Northwest of Tibet and it has major mountainous region which is occupied by ranges like Tien Shan, Kunlun etc. With an area of 9,596,960 sq km it is the world’s second largest country area wise and the capital city is Beijing (Sharma, 2012). The population of China is over 1.3 billion and currency is Renminbi (Yuan).

PESTLE Analysis of China

It is very important to conduct a country and market analysis along with internal SWOT analysis whenever a company starts to consider international expansion (Sullivan, 2002). It has been found that countries which have poor infrastructure and are at higher risk are considered to be  poor candidates for doing any kind of business activities for MNC’s irrespective of their marketing potential. Country Analysis consists of four major factors:

• Political Environment
• Legal Environment
•  Technological Environment
•  Economic Environment

Political Environment

In the past decade China has become a bit liberal and has opened its markets for the world investors and created laws and regulations going along with the World trade Organisation Guidelines (WTO) (Handy, Lim and Milsom, 2003). This philosophy has been helpful in encouraging foreign investment in China. But there are some risks also associated while planning an expansion in China for MNC’s. Some of the major political factors of China are listed below:

Constitutional System

For its decision making processes and governing the country China follows Communism or socialist system in the political environment and that is why the sole political party which leads the country is called Communist Party of China. The government has the power to solely control all the actions or activities which are done by organisation or individual. Thus the purpose of working in China means making significant contribution to the nation as well as the government.

Stability of Government

The Chinese government is quite stable because of governmental administration as it is not public either to the press or through internet. Thus the involvement of citizen in politics is very low due to huge restrictions being imposed by government. Due to cheap labour rates in China it has been able to achieve rapid growth in manufacturing and industrial sector but still there are problems like demographic pressure, management of environmental degradation and extensive immigrations from rural to urban areas.

Business Freedom

There are very strict restrictions imposed on MNC’s which want to enter the Chinese trade , but recently it has become a bit liberal as now it takes just 37 days to start a new business in China whereas it takes 38 days in rest of  the world to start business. With the entry of China in WTO it has introduces Supermarketization and opened its markets for MNC’s.

 Trade Freedom

In the past decade China has made its trade policies a bit liberal for the outside world as its weighted average tariff in 2008 was found to be 3.9.

Tax Policies

 Looking at the Appendix A attached for economic data of China it is evident that the corporate tax rate in China is moderate and the Income Tax Rate is higher. The government supports more of new technology business and allows foreign institutions to enter its financial institutions as it helps in providing foreign currency. Due to lower corporate tax rate many MNC’s have entered China for internationalisation and thus FDI for China has increased rapidly.

Legal Environment

The government of China is trying to create a strict legal system by following tough steps by supporting free commerce between countries and thus embracing the globalised marketplace. The present legal system of China started developing in late 1970’s. In order to govern the foreign investment the Chinese government developed a strict legal structure in 1979 in the form of Sino-Foreign Equity Joint venture and since then it is trying to develop a strict legal system which not just protects their rights but also the rights of their foreign partners at the same time (ChinaLaw, 1998). But there is a challenge in policy making in China its is just like steering s super tanker as it takes very long time for approving and turning the policy into reality (Jackson, 2002).

 Employment Regulations

The labour regulations of China prove to be a hindrance in the productivity growth and the overall employment. The cost of employing a non-salaried worker by the company is very high in China. Along with that dismissing any employee needs a prior consultation with the labour union as well as the local labour bureau too.

Technological Environment

 China has been putting great emphasis on science and technology as in order to revitalise the country science and education play vital role. That is why China has been trying to define system which helps in strengthening the innovation capacity indigenously and it has been one of the main objectives of the 11^th Five Year development plan of China to increase R&D investment. That is why the spending of China in R&D has increased from 34.8 billion Yuan per year in 1995 to around 160 billion Yuan every year in 2004. AS can be seen from the Appendix B which depicts the table for China’s R&D expenditure and shares to GDP.

 Science and Technology

Through the past decades science and technology have shown rapid development in terms of achievements in China as they have done many discoveries in the field of science. Some of the major achievements in the field of science and technology is the discovery of Daqing Oilfield, successful development as well as testing of  hydrogen and atom bombs, positron and negatron electronic collider, constriction of first  atomic reactor, synthesis and development of crystalline insulin, development of nuclear power stations,  technology for  satellite launching and carrier rockets. Rapid improvement in the field of science as well as technology leads to creation of numerous jobs in the manufacturing industry which in turn also helps in making the life easier and at the same time better too.

Research and Development

 In order to develop and enhance the R&D industry Chinese government has designed and implemented many plans and designs. Some of the programs supporting the development of R&D in China which have been launched successfully are the “Torch Program” and “the Scaling heights Program”.

Economic Environment

It has been found that the economic freedom score of China is 51.0. With the population of 1.3 billion the unemployment rate in China is 4.2% and the growth rate is 9.0%. The inflation in China is 5.9% and FDI inflow is $108.3 billion.

Figure: Economic Freedom vs. World Average

 Credit Accessibility

In China it has been found that the government directly as well as indirectly controls the financial institutions as well as the banks. Since the judicial system in China is very, much vulnerable to the political influences and issues, so the investments done in China are also regulated and controlled.

Unemployment rates

China has total labour force of 812.7 million and the total labour force distribution according to occupation in China is:

 Agriculture- 39.5%

Services- 33.2%

Industry- 27.2%

The unemployment rate found in China in 2008 was 4.2%.

Fiscal Freedom

Due to lower corporate tax rate in China many MNC’s have entered the market of China which has lead to increase the number of FDI’s in China. Moreover in October 2008 according to the new policies no individual income tax would be imposed on interest on the bank deposits. IN the recent years the overall tax revenue which has been recorded as percentage of GDP is found to be 18.3 in China.

Monitory Freedom

Since the economic freedom score of China is 51 where as the inflation rate is 5.2% from 2006 to 2008 which indicates that it is s mixture of both control as well as free market. This helps in determining the price of the product sold from the quantity demanded for the product. But many a times the government intervenes in case of certain goods or products in order to maintain the stability of the price of those commodities. The Chinese government also gives subsidies to some of the small businesses and industries in order to compete with foreign goods so that they can be sold at lower prices.

Investment Freedom

 The Foreign Investment catalogue of china defines that different kinds of groups have been formed for foreign investments like, prohibited, permitted, encouraged and restricted as per the Chinese Laws and regulations. There are very strict regulations on the financial transactions too.

Financial Freedom

 The financial systems in China are very tightly controlled by the government and in the year 2008 there were approximately 5600 supervised financial institutions in China and there were just two private banks in China and there were found to be around four state-owned bank accounts for  more than 50% of the assets. The China Banking Regulatory Commission is the sole supervising and regulatory authority for financial system.

Interest Rates

Discount rate of Central Bank- 2.79%

Prime Commercial lending rate- 5.31%

Inflation

Inflation rate- 5.9% (2008 est.) and 0.7% (2009 est.)

 Due to stable currency of China the inflation rate declined drastically in China from 2008 to 2009.

Managing Interdependencies: Social Responsibility and Ethics

The social infrastructure of China is growing every year in strong manner which helps in improving the quality of life. Education and health are two very important factors which influence the special infrastructure. Social Responsibility covers all the expectations which the corporations are concerned with regard to social and economic effects of the decisions taken by them. MNC’s have to bear complex social responsibilities as they are related to global issues like:

•  Economic Development
• Cultural Issues
• Legal Issues
• Additional Stakeholders

Therefore MNC”s should follow Integrated Approach for Social Responsibility where the organizations are of the same opinion of conducting moral as well as ethical behavior in the other country. Thus due to this emergence of global corporate culture there is created socioeconomic interdependence. Integrated approach also helps in providing basis of judgment in relation to decisions and situations.

 Therefore there are some Ethical behavior and Social Responsibility Guidelines which have been developed by MNC’s which cover (Blanchard, n.d.):

• Development of code of ethics across the globe
• In the situation of particular unsolvable,  major , ethical problem there should be withdrawal from the problem market by organization
•  Consideration of ethical issues in strategic development
•  Development of  “ ethical impact” statements in periodic manner

The Challenges of International Management and Planning

 International management is vital part of International Business which comprises of subfields like International Finance, International Trade and International Marketing (Nowakowski, 1999). International Management is defined as the decision making process which involves planning, organization, leading and controlling in a totally multicultural area (Nowakowski, 2000). Thus international Management and planning involves management of business which covers the country or areas beyond the boundaries (Rozkwitalska, 2007). In case of international Management there are several key issues which are being faced some are listed below (Czinkota and Ronkainen, 2010):

• The Context of International Management in global stage
• Capitalization of International opportunities
•   Effectual Interaction in the International environment
•  People Management in the International Arena (McFarlin and Sweeney, 2006)
• Management of International Strategy Implementation and Strategy  Planning (Phatak, Bhagat and Kashlak, 2004)
• Management of cross cultural processes and people
•  International Environment
•  Ethics in International management (Phatak, Bhagat and Kashlak, 2004)

The Role of Culture in International Management

The one theory of Perlmutter’s EPRG concept helps in dealing with cultural dilemmas in international management which is one of the evolutionary theories. Decisions which are made  within any organization or MNC are mainly influenced by the internal factors for example the skills and the strategies being possessed by the labor force along with the factors present in the international business environment which also includes the  activities of their competitors and the market. The external factors cover the national culture of that country too (Mead and Andrews, 2009).

Figure 1: Organization in its environment (Mead and Andrews, 2009)

The Cross Cultural Communication Environment

The I/R Grid is another evolutionary theory which helps in dealing with indirectly with cultural dilemmas (Walker et al., 2003). Adler’s model of cross cultural management shows the relative importance of MNC’s or Transnational Corporations (TNC’s) corporate culture, organizational culture and national culture prevailing in these foreign subsidiaries. The synergistic culture model makes an assumption that the MNC’s corporate culture might arise or draw from foreign subcultures in order to create a more synergistic whole (Koźmiński, 1999).

Cross Cultural Alliances and Strategic Implementations

 International Strategy should be effectively implemented through a structured process which requires great amount of negotiation and decision making process. The MNC’s follow multinational strategic formulation for cross cultural alliances it has been found that Multinationals usually follow the ‘hub and spoke model’ for strategic formulation in the international markets. IN this case the Transnational Company’s home country remains as the hub, where the transnational is considered to be an integrated network of several interdependent subsidiaries (Westney and Zaheer, 2003). Strategic development along with cross cultural management skills is very important critically for any MNC for effectual international management (McFarlin and Sweeney, 2006). The cultural coexistence model of cross cultural management is being implied by multinational corporations.

Organizational Structure and Coordination Systems

 Managing separate functions like marketing, human resource, finance R&D etc. is required while managing the international activities in the MNC’s that is why they need to follow proper organization structure and coordination systems. Human resource and Marketing being culturally sensitive show EPRG attitudes. In the ethnocentric approach the headquarters have the right to make all the major decisions related to human resource management practices and marketing decision that is all the major decisions related to personnel management. In ethnocentric approach all the vital positions are held by the parent country nationals or Expatriates in the foreign affiliates.

 Whereas in the Polycentric approach the main control is being taken over by the foreign subsidiaries especially in the case of human resource management, however the headquarters still have the full right to take all the strategic decisions. The host country nationals in this case are at the topmost positions in the foreign subsidiaries.

 In case of geocentric approach of human resource management the company mainly makes the staffing on the basis of performance and capability and skills of the person recruited while choosing the international staff and in this case the nationality of the staff is not taken into account. A regiocentric philosophy is a combination of both polycentric and geocentric approach. In regiocentric approach the staff or the employees  have the freedom to move from one nation to the other in the  specific region  but in this case the decision related to employment are  completely connected with  performance , skills and abilities of the potential staff (McFarlin and Sweeney, 2006).

Managing international Teams and Workforce diversity

 The endeavors which help in leading and controlling the international staff in such a manner that the international staff along with its diversity and the potential capabilities linked to the staff all help in contributing to the  value for the multinational enterprise is called Diversity Management (Erlenkamp, 2007). It has been found that diversity has been creating stress and therefore organizations need diversity management especially MNC’s and that is why they have introduced diversity management in order to facilitate the concept of diversity so that it can enhance the effectiveness of the organization.

 Especially MNC’s have realized that diversity in workforce helps in gaining competitive advantage and it can be seen that diversity management helps in  gaining competitive advantage in various areas for the organization and some of the areas which get affected positively through diversity management are :

•  Costs
•  Acquiring Resources
• Employment Branding

The best example of diversity at workplace can be seen at luxury clothing brand Burberry where Stacey Cartwright and Angela Ahrendts are the Chief Financial Officer and Chief Executive Officer heading the boardroom which is different from the commonly male headed boardrooms.

 There are many dividends of Workforce diversity as the corporations whether they are MNC or domestic which have string and diverse organization show many dividends which can be seen below (Daft, Kendrick and Vershinina, 2010):

• Enhanced use of Employee Talent in the organisation
•  Increased knowledge and capability to understand market place like Ford Motor Company has organised their workforce where they hire 25% staff of minorities in order to foster a cultural inclusion.
•  Enhanced and quality  problem solving skills in the team for example Ernst and Young has 85% of workforce still male and they are trying to create more diverse senior leadership to enhance their business.
• In the leadership position there is more understanding between the leader and staff.
•  Helps in cost reduction along with increased turnover, lesser lawsuits and absenteeism in organisation.

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